The Rising Rent Conundrum

April 20, 2015

It would be an
understatement to say that these are good times for the apartment industry.
For most of us, they are probably the best in our lifetimes.

Capital is abundant,
and growing demand is outpacing increases in supply even as new units come
online. And there's reason to believe there is still a significant amount of
pent-up demand still to come into the market. To the outside world, though,
it all consolidates into one conclusion-rents are rising.

Understandably, our
member firms want to make sure their investors (and prospective investors)
know about the healthy rent increases they have been getting in some markets.
And our members should be proud of their business and operational acumen. But
I cringe every time I see someone quoted in the media saying how much they
have been able to "push rents" because the smart business storyline
is rarely the message repeated in the mainstream press.

To the outside world,
rising rents-particularly in a stagnant income growth environment-just means
more and more families are having a hard time making ends meet. So, while
talking about pushing rents makes sense for investors, it doesn't help our
industry's overall favorability with consumers or policymakers.

Our success today
makes us easy targets for inclusionary zoning or rent control proposals
championed by often well-intentioned advocates seeking to address the
affordability gap. They hear about rising rents and want a solution, often
unaware of the real costs and unintended consequences of many of these
so-called easy and no- or low-cost solutions-namely, even higher rents and
less supply.

So, how should we, as an industry,
be talking about rents and affordability? Here's what I say when the topic
comes up.

First, today's strong
rent growth is a temporary situation in what is a highly cyclical market
driven by factors largely outside of the industry's control. The collapse of
the US financial markets in 2008 virtually shut down new apartment
construction for several years, severely constricting supply at a time when
rental demand was about to surge.

Second, apartment
construction is ramping up. As those units are delivered, rent growth will
moderate. But even with more apartments in the pipeline, construction
activity remains below the level needed to meet rising demand. Many
non-financial obstacles to new development, such as unnecessary and
duplicative regulations, outdated zoning policies and Not-In-My-Backyard
(NIMBY) opposition to apartments, continue to stifle new construction and
raise the costs of those properties that do get built, contributing to higher
rents for our residents.

Third-and this may be
the most important fact-American's affordable housing shortage is more than
just a housing problem. It's not only that rental housing has gotten more
expensive to produce and operate, but it's also that other economic factors
have suppressed household income growth. On an inflation-adjusted basis,
median renter household income today is virtually the same as it was in 1981.

Because income
stagnation is such a big part of the equation, we simply can't build our way
out of this affordable housing shortage. In fact, in many markets where
demand is strongest, even if, hypothetically, developers agreed to take no
profit, the cost to build still exceeds what people can afford to pay.

And fourth, for those
who still argue that there are outsized profits in the multifamily sector,
I'm quick to point out that rents, when adjusted for inflation, are roughly
on par with what they were in 2002, meaning apartment firms' purchasing power
has remained basically flat over the past decade plus while operating costs
have continued to rise.

A long-term solution
to rising rents requires both meaningful income growth and the removal of the
many barriers to apartment construction. State and local governments have a
number of tools available to that end while the federal Section 8 voucher
program could also be better leveraged to address today's affordability
issues. Also critical is the preservation of existing affordable housing. By
finding ways to keep more properties a viable part of the overall apartment
stock for longer, we can help add to the available supply of housing,
reducing the pressure on rents.

That's the message we
are taking to policymakers at all levels. And it's one I hope you will join
me in spreading as you talk to reporters as well as state and local
officials. To help you drive these points home, we've created a new set of
advertising tools; published new national, state and metro area economic
impact data; and updated our interactive apartment calculator as part of the
recent launch of the latest iteration of our national public relations
campaign. Please check it out at www.WeAreApartments.org.